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Hardship Withdrawal

A hardship withdrawal is a feature of some 401(k) plans that allows you to withdraw funds from your account while you’re still employed, but only if you’re facing a significant financial hardship that’s defined by the IRS and your plan’s terms and conditions.

Typically, the IRS defines a hardship as an immediate and heavy financial need, and the amount you withdraw must be necessary to satisfy that need. This can include certain medical expenses, costs related to the purchase of a principal residence, tuition and education expenses, payments to prevent eviction from or foreclosure on a principal residence, funeral expenses, and certain expenses for the repair of damage to a principal residence.

However, it’s important to remember that hardship withdrawals are not like loans against your 401(k), they can’t be paid back. Once the money is taken out, it’s no longer invested and growing tax-free for retirement. Plus, you’ll owe income taxes on the withdrawal, and if you’re under age 59 1/2, an additional 10% early withdrawal penalty may apply.

It’s usually recommended to consider other options for meeting financial needs before resorting to a hardship withdrawal, because of its potential to significantly impact your long-term retirement savings.